Iran: Can we evade the sanctions?

Setup of a SPV

The announcement followed a meeting with the Iranian foreign minister Javad Zarif on 24 September 2018. The representatives of those countries who want to maintain the Joint Comprehensive Plan of Action (JCPoA) agreed among themselves to install a means to continue trade with Iran and uphold the country’s commitment to the nuclear deal.

More precisely, this is about a special purpose vehicle (SPV) dedicated to the sale of Iranian oil. The equivalent of the sum one country pays in for petroleum will in return be retransferred to Iran for goods – following barter logic.

Avoiding transactions in US dollars can thereby – theoretically at least – evade the sanctions that come with them. As a first step, US sanctions had been re-imposed on August 6th; in a next step, Iran is supposed to be exempt from the international monetary system by November 4th. Consequently, countries still performing transactions with the country will be sanctioned – also affecting oil imports. The SPV to be set up will, therefore, have the aim to circumvent this last step and to allow transactions between Iran and other states.

But certain sources voice doubts: if the US changes the legislative framework of its sanctions, such commercial operations could also fall under the ban, which in turn could again result in financial penalties for the companies concerned.

Requirements and results of the JCPoA

In order to understand the current negotiations, the deal scrapped by Donald Trump needs to be conceived. The Iran deal was supposed to contain the country’s nuclear programme. Iran defends the latter assuring its peaceful nature. Nonetheless, the undersigning countries (Germany, France, the UK, China, and Russia) negotiated certain guarantees in exchange for the incremental lift of the economic sanctions which had been plaguing Iran.

These concessions comprise several elements, including the following:

1. limitation of new centrifuges for uranium enrichment to a maximum amount of 5060 until 2026 (though, there were already 20,000 in 2015)
2. limitation of the uranium stock to a maximum amount of 300kg until 2031 (with a fixed level of enrichment at 3,67%)
3. limitation of research and development to the site at Natanz
4. ban on the installation of new heavy water reactors and on the production of heavy water until 2031
5. inspection and surveillance by the International Atomic Energy Agency (IAEA) at all nuclear sites

According to the Obama administration, the 20,000 centrifuges and the uranium stock in Iran at that time were enough to build 8-10 bombs within two or three months. In this sense, the JCPoA allowed equally to mitigate the economic pressure, which initially led the country to strive after nuclear resources, and to delay the critical time to actually build a bomb for at least a year.

In 2015, the IEAE director-general declared that even if Iran had been developing a nuclear arsenal, that there has not been “any single credible indicator” about similar activities ever since. In consequence of this confirmation of the country’s compliance, the Council of the EU decided on 16 January 2016 to lift the sanctions. However, following his electoral promises, Donald Trump then put the deal into question in May 2018.

Blocking Statute: from Cuba to Iran

In reaction to the President’s move, the EU decided to make use of a regulation dating back to the 1990s, originally designed to circumvent the US embargo on Cuba. It shall maintain the access to the Iranian market despite the American turnaround and the accompanying financial risks.

The so-called Blocking Statute allows for European companies and persons to not defer to economic sanctions – especially given that the European Commission regards them as illegitimate. Moreover, it allows companies which have taken harm to claim damages and to render – within the EU – all effects of decisions by foreign courts taken on the basis of the American sanctions void.

The unclear situation may prove costly for Iran and European business. Between 2012 and 2016, the joint sanctions of UN, US and EU cost the country more than 160 billion dollars due to missed petrol sales. In France, certain industrial enterprises well represented in the US, such as such as Total or PSA, decided to just retreat from the Iranian market.

Just like the Commission decided at the end of August to grant 18 million euros of financial aid to Iran, there European national capitals seem to have understood the necessity to safeguard the progress made thanks to the JCPoA as well as the strategic importance to maintain commercial ties with the country. The EU is fighting for the preservation of a precarious regional balance and to contain Iran’s nuclear ambitions, a heavily destabilizing factor in the Middle East.

Skepticism regarding the feasibility of fully circumventing the sanctions is allowed. But the Commission experts’ ingenuity is actually needed in the face of Donald Trump’s record so far. In any case are the diplomatic efforts already a success – after all, France, Germany, the UK, China and Russia have managed to jointly proceed against the President’s decision to put the JCPoA into question.